Budget 2014 - 7 rumours and the reality

April 2014

When Joe Hockey delivers the 2014/2015 Federal Budget on May 13, he will either be one of the most respected men in the country for instigating much-needed structural reform or one of the most unpopular if predictions of a slash and burn approach to social welfare come to fruition. 

Or perhaps a bit of both, depending on your view and circumstances.

The Treasurer has been laying the foundations for reform for quite some time. Once a point of pride during the GFC, Australia's economic growth has started to look less than stellar at 2.8% in 2013. Despite surviving the GFC in reasonable shape, it's when we see our Kiwi cousins across the Tasman with 3% growth on the back of a strong dairy exports that it becomes clear we're not thriving.

The challenge of raising revenue
The Government's challenge is to ensure that they do as much as possible to encourage growth without hindering productivity. Growth equals jobs, investment and higher tax revenues, which has been the source of much commentary over recent days. Treasury Secretary, Martin Parkinson, has made it clear that Australia can't rely on growth alone, but the debate over whether to raise the GST has been met with a firm "no" from the Government.

Auditing the nation's books
One of the Government's early moves was to appoint the National Commission of Audit, headed by Business Council of Australia President and former Transfield Chairman Tony Shepherd. The Commission's function it to help the Government identify how to improve efficiency and productivity of its expenditure so that it can get a better 'bang for its buck.'

In mid-February, the Commission of Audit completed the first phase of its review and its report is expected to lay down foundations for impending budget reforms. Key parts of the first phase have been leaked to the media, so while the report and Government's response have not yet been made public, there is much speculation around what is coming on Budget night.

It's not uncommon for the Government to start leaking bad news before the budget to soften up the ground for what's to come as well as test how a particular measure is likely to be received before it's confirmed. So what is on the table?

Rumour 1 – The end of 'middle class welfare'
Mr Shepherd was recently quoted as saying that "… people who can look after themselves should look after themselves. They shouldn't rely on government. If people are getting welfare who are well and truly able to look after themselves, that's not fair. When our report comes out you'll see it all."

So how will the reforms be structured? The rumour is that the income test for Family Tax Benefit B will be reduced. Previous proposals have recommended combining family payments, including Family Tax Benefit A and B into one. Access to family benefits is likely to be tightened and there's a high likelihood of a restructure to how family payments are applied.

Rumour 2 - Sale of Government assets
Mr Hockey has said that the Government needs to look at "How we can recycle assets; sell existing government assets, giving mums and dads of Australia an opportunity to buy those assets out of their superannuation monies or through other means, and recycle precious taxpayer money into new productive assets that are going to facilitate growth in the non-mining sector". The sale of MediBank Private has been discussed for some time. Offloading the ABC and SBS are also possibilities.

Rumour 3 - Means testing Medicare
Much discussion ensued following the leak of a Health Department plan to the Australian Financial Review, which recommends changes to how GPs are compensated by Medicare, in particular limiting bulk billing to concession car holders and children. The Government has not ruled out the tiered system but repeats the line that Health Minister Peter Dutton has been using "….our 1980s Medicare model health system is tracking on an unsustainable path".

Rumour 4 – Prime Minister's maternity leave scheme scrapped
The Commission of Audit is reportedly unhappy with the cost of the Prime Minister's paid parental scheme, due to commence 1 July 2015 and costing $5.5bn per annum and funded by a 1.5% levy on large business. The scheme would see recipients receive their full salary for up to 6 months, capped at $75,000 plus super. While most of the debate has been on 'rich women with high incomes being paid to stay at home', statistically just 2% of women in the Australian workforce earn over $100,000 compared to just under 8% of men. The paid parental scheme does not have broad support from other political parties to get through both the lower and upper houses unchanged.

Rumour 5 – Increasing the GST to 12%
As mentioned above, while the subject of raising the GST has been met with a firm 'no' from the Government, there are plenty of voices rising up to support the idea. Martin Parkinson, Treasury Secretary is one, former Treasury boss Ken Henry is another.
This debate is likely to continue for some time, however the Government has made it pretty clear that it won't be part of this year's budget. That said, the pending White Paper on Tax Reform from the Abbot Government (as promised within its first two years) may well continue the debate.

Rumour 6 – Increasing tax on super
Australians have over $1.3 trillion invested in super funds and provided they stick to the rules, the tax paid on superannuation is relatively light compared to other forms of investment. While it might be tempting to look at raising revenue by taking a larger percentage in tax, it's pretty unlikely that the Government will act on it. The Government has already stated that it will stop tinkering with the superannuation system to give people certainty and confidence to keep investing in it.

Rumour 7 – Raising the pension age
Mr Hockey has been quoted as saying that the eligibility of the pension was "…set at that level in 1908 when life expectancy was 55." The previous Government raised the pension age by six months for every 2 years from July 2017 until it hits 67 in 2023. The call from the Productivity Commission to raise the pension age to 70 was a view supported by the Treasurer. Our view is that pension age will not move beyond the previously announced reforms at this stage. If there was a change, the Government might speed up the timeframes for the increase to the pension age.

So what's missing?
What has been noticeably absent from the leaks is any changes directly relevant to business. The Government has already stripped out most of the excess concessions available to business when they decided to repeal the mining tax and associated spending measures such as loss carry back rules and generous deductions.

There is something of a simple reason for the lack of business reforms or business-related spending cuts they are not vote winners or losers compared to family tax or superannuation, which directly affect voters. Reforms to Government spending on business barely scratch the surface unless they are job killers.

The last remaining vestige is the small business CGT concessions that allow, in some circumstances, small business to reduce the capital gains tax they pay on the sale of assets to nothing. The Henry Review back in 2009 recommended changes to these concessions to remove the active asset 50% reduction and 15-year exemption. Our expectation is that these concessions won't be removed just yet but will remain sitting as a target and potentially will come up again in the Government's upcoming white paper on tax reform.

For business, it is more likely that we will not see the structural reforms needed to grow productivity, jobs and investment – such as reducing the company tax rate to 28.5% from 1 July 2015 as promised by the Government during the election and the changes to the GST take that would see State Governments remove payroll tax.

Outside of business a potential area of change is the general 50% CGT discount. The discount currently applies to assets that have been held for more than 12 months. The discount has already been removed for foreign and temporary residents from 9 May 2012. The question is whether it will be scaled back or scrapped for residents.

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Last updated April 2014. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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